Interest Rates - Where are they going and how fast

[Silver940]

So we are looking at re-mortgaging very soon to add some on for an extension. LTV will be about 40%. Currently off the end of the Capped rate we had but Nationwide started to charge a 38/month admin fee last year - nice!

So looking about a bit, HSBC seem to have so good deals but what about interest rates, clearly they will be going up, rumours of June possible for a token rise and then late in the year and next year some more. How fast do we think they'll go up? Fast enough to make a 5year or 7 year Fixed worthwhile?

In the past I have only ever commited to a deal for 2years but I get the feeling now would be a bad time to go for a longer one.

PH thoughts on the subject?

[fid]

Rates are likely to increase towards sensible, realistic levels over the next few years and there's not a substantial difference between HSBC's 2-year and 5-year rates at present, so I'd be getting fixed for as long as possible while you can.

[R1 Loon]

I'd hazard a wild guess, that rates will be going up.

On that basis, just decide whether you want surety of monthly outlay, or happy for it to increase gradually over the next 3 years. Don't look at fixed rates as a way to make money, look at them as a way to help you budget each month.

[fid]

And to over-pay during the fixed period if you can, to ease any pain of higher rates at the end of the period.

[Beardy10]

It's hard to say when they will go up but when they do I would expect them to go up very fast. With rates being so low raising them by say 0.25% or even 0.5% isn't really going to make much difference we are still talking about incredibly low interest rates historically. Realistically rates aren't going up til RBS and Lloyds are in better shape and have an outlook which means they will make consistent profits....the current low interest rates are to primarily there to prop the banks up.

[fid]

Beardy10 said:

...Realistically rates aren't going up til RBS and Lloyds are in better shape and have an outlook which means they will make consistent profits....the current low interest rates are to primarily there to prop the banks up.

http://www.telegraph.co.uk/finance/comment/damianr... The 4th paragraph seems to be at odds with that, but I don't entirely understand, so wouldn't mind somebody explaining.

[Beardy10]

fid said:

Beardy10 said:

...Realistically rates aren't going up til RBS and Lloyds are in better shape and have an outlook which means they will make consistent profits....the current low interest rates are to primarily there to prop the banks up.

http://www.telegraph.co.uk/finance/comment/damianr... The 4th paragraph seems to be at odds with that, but I don't entirely understand, so wouldn't mind somebody explaining.

Whoever wrote that article is utterly fking clueless. Banks make money out of something called a steep yield curve which for simplicity sake means they borrow money cheaply from you and me through their deposit base and then lend it for longer terms at higher interest rates. For example they borrow at 0.25% and then lend it at 6%.....this means they can generate profits and repair their balance sheet. If they pay you and me higher interest rates believe me they won't just be lending at the same rates. The other thing the feckless journalist doesn't seem to understand is that banks have to borrow for terms like 10 years so they have a locked up source of funds so that there is less chance of there being a run on the bank through all their short term deposits being withdrawn in times of panic/stress....that is a regulatory requirement. Unfortunately the likes of Northern Rock and RBS did the bare minimum of long dated funding to maximise profits so when the st hit the fan they had nowhere to go...except the tax payer. Said journalist seems to have absolutely no understanding of what has happened in the last three years....

[jeff m]

It is not just the int rate you have to consider.
Inflation, if you borrow now you pay back in tomorrows money. A good thing.

They keep making inflation estimates or predictions that are really not accurate. It's like they are not "permitted" to use a number above 2.

So, if you delay your house extension you will pay more for it. If inflation is 4% then cost of your extension goes up by 8 - 10%
With regard to int rates, India, China, Korea are possibly going to raise theirs.
When that happens others will follow.
It will be a reluctant follow, but they will.

[auditt]

Aint the economy at its knees at the moment, with VAT/Petrol prices going up and now they want to raise interest rates....Are they trying to put us into a depression?

[auditt]

Two rate rises, according to the telegraph. Even if its .5 x2 still the rates at 1.25% will be low

HAPPY DAYS

[cuprabob]

You've got love them. They put up fuel duty which increases inflation and then they say, we need to control inflation so we'll raise interest rates.

Inflation isn't going up because people are spending out of control but because of the thieving energy companies and the government.

[DonkeyApple]

Silver940 said:

So we are looking at re-mortgaging very soon to add some on for an extension. LTV will be about 40%. Currently off the end of the Capped rate we had but Nationwide started to charge a 38/month admin fee last year - nice!

So looking about a bit, HSBC seem to have so good deals but what about interest rates, clearly they will be going up, rumours of June possible for a token rise and then late in the year and next year some more. How fast do we think they'll go up? Fast enough to make a 5year or 7 year Fixed worthwhile?

In the past I have only ever commited to a deal for 2years but I get the feeling now would be a bad time to go for a longer one.

PH thoughts on the subject?

For starters they are only going up, that's a given.

The key thing in this next part of the cycle is that we have printed a lot of new GBPs and these will eventually trigger an inflation spike for which rapid rate hikes will be utilised to get under control.

The question is how bad is the inflation going to be. My view is that at some point in the next few years it is likely to get pretty hairy and we will have moments of 'out of the blue' 50bp or even 100bp hikes.

However, to start with any hikes will be tiny (25bp) and leaked to the market well in advance to test the water.

At present there isn't much in the way of domestic inflation so little pressure to raise rates. All inflation is via taxation or external variables such as crops and commodity rises.

For me the key indicator that the climbing process is imminant is once employment starts increasing. There is a lot of slack in the economy at present but once unemployment begins to fall that will be the best indicator that we're going to get (outside of the US being 6 months in front) of the process for raising rates.

Another vital variable are the current lending margins. There isn't much competition or appetite at present so margins are a good 2 to 300 bps on basic debt. We all saw that in 2007 margins were as low as zero + fees. This current fat margin means that lenders could actually absorb the first 100 bp or rises without passing it on to consumers but they will only do that if there is significant competion in the market place. One thing we know for sure is that unless we are looking at 4+ years down the line there will not be much competition so lenders will almost certainly maintain fat margins.

This all means that it is entirely possible to see new lending offered out at near the 10% mark in the not too distant future.

All this means to me is lock in at the best rate for the longest period.

2 year deals were always about the hook and the fee. They are worthless deals in a climate such as now. 5 year would be the minimum I would look at.

[NorthernBoy]

DonkeyApple said:

2 year deals were always about the hook and the fee. They are worthless deals in a climate such as now. 5 year would be the minimum I would look at.

Worthless?

Oh dear, I feel such a fool now. I mean, here's me, trading interest rates for a living this past decade, and I've just taken out a two year fixed-rate mortgage...

If only I'd asked on piston heads before being so rash.

[dibbly dobbler]

OP - hope you don't mind me diving in here but can I ask the PH interest rate experts what they think I should do.

Current situation is that I have a lifetime base rate tracker with HSBC - something like B of E base + 0.45 I think. Clearly it's been great over the last couple of years and we have been overpaying at a level which is roughly equivalent to a 5% base rate. There's enough room in the finances for it to go a bit higher than that without massive pain but should I be considering a move to fixed or just sit tight in the knowledge that such deals are unlikely to come up again any time soon (if ever!). Got about 17 years to go.

Any thoughts/advice would be gratefully received

[DonkeyApple]

NorthernBoy said:

DonkeyApple said:

2 year deals were always about the hook and the fee. They are worthless deals in a climate such as now. 5 year would be the minimum I would look at.

Worthless?

Oh dear, I feel such a fool now. I mean, here's me, trading interest rates for a living this past decade, and I've just taken out a two year fixed-rate mortgage...

If only I'd asked on piston heads before being so rash.

Don't be so sensitive. Living in the Wharf does do funny things to a man.

We both know only too well that in the run up to 2007, 2 yr deals were peddled as they guaranteed repeat fees in a relatively static rate resi lending market. And strangely, when you compared those fees to the funding differential between the 2 year and other deals, low and behold, how many punters do you think were paying way more on the so much cheaper looking 2 yr?

And this hasn't changed, they are a tool to hook punters in to a cycle of repeat fees, excess charges hidden behind superficially low rates and stimulate excess re-mortgage and renewal activity.

You're pissing in the wind with institutional funds. A waste of time and money. Retail margins are where it's at. You'll never pedal the most appalling crap with the fattest margins so easily to such blind punters. At worst, if your product is really bad you can pay a few grams of dirty coke to get a celeb monkey to promote it.

[fid]

NorthernBoy said:

DonkeyApple said:

2 year deals were always about the hook and the fee. They are worthless deals in a climate such as now. 5 year would be the minimum I would look at.

Worthless?

Oh dear, I feel such a fool now. I mean, here's me, trading interest rates for a living this past decade, and I've just taken out a two year fixed-rate mortgage...

If only I'd asked on piston heads before being so rash.

Thanks Beardy...see why I didn't understand it? Thought there was some logic that I didn't know about

Northern Boy, what makes you think 2 years is better than 5 at the moment? At the first hint of an increase, will 5 year fixed mortgages even be available?

[NorthernBoy]

fid said:

NorthernBoy said:

DonkeyApple said:

2 year deals were always about the hook and the fee. They are worthless deals in a climate such as now. 5 year would be the minimum I would look at.

Worthless?

Oh dear, I feel such a fool now. I mean, here's me, trading interest rates for a living this past decade, and I've just taken out a two year fixed-rate mortgage...

If only I'd asked on piston heads before being so rash.

Thanks Beardy...see why I didn't understand it? Thought there was some logic that I didn't know about

Northern Boy, what makes you think 2 years is better than 5 at the moment? At the first hint of an increase, will 5 year fixed mortgages even be available?

It's all down to personal circumstances, and depends on what you are after. Two years is a long time for me, and the flexibility that I get from being able to settle, penalty free after that, is worth a lot.

2.75% fixed for two years simply beats 4% for 5.

For me the 2 year was unquestionably the far better deal, for others, that may not be the case.